Purchase order financing (a.k.a. purchase order funding, PO financing, and PO funding) allows your company to purchase goods from your supplier or fund manufacturing of product to complete an order to your company from a creditworthy customer when you lack the working capital to do so on your own. The order may be for finished goods that you acquire from a domestic or foreign supplier, and then deliver to your customer. The order can also be for goods that require some amount of manufacturing or repackaging before being delivered to your customer. By being able to complete the order you maintain the relationship with your customer and have the opportunity to receive future orders (and profits) from that customer.

There are 3 types of purchase orders. They are listed in increasing degree of difficulty for obtaining purchase order funding. For the last two the financial strength of your company and experience of your company in doing the manufacturing or repackaging are very important. For the last two, your company cannot have negative equity.

Purchase orders for goods that are purchased from an independent third-party supplier in a finished state (you are probably a distributor, wholesaler, product designer, or importer that simply ships the product to your customer without any manufacturing or repackaging by your company)

Purchase orders for goods on which your company performs light manufacturing or repackaging (e.g. Importing of electronic components that are tested and then repackaged before delivery to the customer)

Purchase orders of component parts on which total in-house manufacturing is done to produce the product being purchased by the customer

A minimum gross profit margin of 30 percent on transactions in which purchase order funding is being considered. It may be possible to do purchase order financing on lower margin transactions, but a contribution from your company may also be required to complete the transaction. You should determine if the transaction will still be profitable after paying the purchase order and accounts receivable financing fees involved in purchase order financing.

Yes. A personal guarantee is always required to obtain purchase order financing. Some underwriters will request a personal financial statement to determine if the personal guarantee could be fulfilled if necessary.

How important are the financials of my company and its principals in obtaining purchase order financing?

The importance of the financials of the company and its principals increases as the risk of satisfying the purchase order increases. For example, your company cannot be in danger of becoming insolvent during the term of the purchase order. The amount and complexity of the manufacturing required to deliver the product increases the risk that the purchase order will not be satisfied. Therefore, the financial strength of the company and its principals together with experience of the company in satisfying similar purchase orders becomes more important when deciding to approve a purchase order financing request.

The amount that will be advanced on the purchase order will be the minimum required to get the order to the point where an invoice can be issued. For example, for finished goods, the advance would be the amount required to buy the goods from your supplier and might also include the cost of freight, insurance, and inspections. Depending on the specifics of the transaction, some funders may request that your company contribute funds to acquiring the products from your suppliers